Question

Under what circumstances government inventions policies are justifiable. Synthesize your answer using notable market structure.

Answer 1

                                    A market structure refers to the system that governs a market. It refers to the behaviour of the sellers and the buyers in the market and hence helps in identifying the entry and exit barriers and also various factors that governs the market mechanism. Thus, in accordance with the various characteristics exhibited, the market structures have been divided in to mainly four major types. They are

· Perfect competition, where large number of smaller firms compete against each other and thus a single firm would not have the market power. Here, no firms would have the ability to influence the market prices and hence the industry as a whole would produce a socially optimal level of output. Here, the entry and exit mechanisms are free and the consumer options are limited

· Monopolistic competition, where a large number of smaller firms would compete against each other and the firms would sell similar, but slightly differentiated products. Thus, this results in giving the firms the chance to set higher prices and the consumers with options of one product over the other.

· Oligopoly, which is dominated by smaller number of firms which results in a state of limited competition. This also helps the firms in using collective market power to increase the prices and hence earn more profits.

· Monopoly, where the single firm would control the entire market and hence the consumers in such an economy would have no options other than to be satisfied with the prices and the product in the market.

                                      On the analysis of the above market structures, the following situations can be identified wherein the government inventions and interventional policies are justifiable

· In case of a monopoly or oligopoly, there is an increased tendency of setting higher prices and thus, the government may take necessary steps to reduce the same

· Consider a market structure where the consumers are forced to choose the product and has no option to choose from. At those times, suitable innovative interventions may be done by the government so that product variety is maintained in such an economy

· The government interventions are also justifiable in cases so as to maintain a judicial mix of products in the market